Tag : Research & Development

From an IPR tax session held in London between Deloitte, Intertrust and IPEG Consultancy, it became clear that Malta may indeed be an excellent jurisdiction to locate intellectual property (IP) and to perform research and development activities (R&D). The legal protection of IP and IP rights is ensured in Malta through domestic law as well as through Malta’s status as a member of the EU and the World Intellectual Property Organisation and a party to a number of international agreements relating to IP rights.

From a fiscal perspective, one of the main features of Malta’s competitive tax system is its effective tax rate (typically approx. 5%) due to the application of Malta’s full imputation system. In addition, while companies which are resident and domiciled (i.e. incorporated) in Malta are taxable in Malta on a worldwide basis, companies incorporated outside Malta that are only resident in Malta (on the basis that the effective management of the business is situated in Malta) are taxable in Malta on a Malta source and remittance basis. Foreign source (passive) royalty income, which is not remitted to Malta, is therefore not chargeable to tax in Malta in the hands of resident non-domiciled companies. A Malta branch of a foreign entity is only liable to Malta tax on a Malta source basis, and there is no taxation in Malta on foreign source royalty income derived via a Malta IP branch (except for that element that is connected to the activities carried on locally at the level of Malta IP branch).

Moreover, in terms of Malta’s so called ‘patent box’ regime, persons carrying out IP licensing activities from Malta may benefit from a tax exemption in respect of royalties and similar income derived from qualifying patented inventions. The 2012 Budget includes also a proposal to extend the scope of the incentive to cover works protected by copyright, including books, film manuscripts, music and art, however details are not yet known. In addition, should R&D activities be carried out from Malta, incentives, typically in the form of significant tax credits computed by reference to the amount of qualifying expenditure, may be available.

Malta’s effective tax rate in brief

5%

As a result of Malta’s full imputation system

0-5%

Malta’s full imputation system combined with claiming foreign tax credits, amortisation/depreciation or any other costs such as finance expenses

0%

Upon application of the ‘patent box’ regime

0%

In case of non-remitted foreign source royalty income derived by a Malta resident, foreign incorporated company as well as in case of foreign source royalty income derived by a Malta branch

Foreign (withholding) tax on royalties paid to Malta may be mitigated (or fully eliminated) under EU law or in terms of Malta’s extensive tax treaty network. In turn, Malta does not impose any tax on outbound dividends, interests and royalties.

Malta offers a high degree of flexibility as regards the vehicles which may be used for IP structuring which include companies, partnerships, trusts and foundations. Each of these may provide certain benefits both from a fiscal and commercial point of view. Moreover, should a securitisation vehicle be utilised to hold IP, due to specific allowable deductions in this respect, essentially no taxable income should be left, and no Malta tax should be payable, at the level of the Malta securitisation vehicle.

Malta also offers a number of benefits with regard to both entry and exit tax strategies. Maltese law offers the option to step-up the value of the IP (from historic cost to fair market value) upon migration (transfer of fiscal residence) or redomiciliation (transfer of fiscal residence and domicile without going into liquidation) to Malta. The stepped up fair market value may be amortised in case of an active trade or business. In turn, various structuring opportunities are available in Malta so as to ensure the tax free disposal of IP such as an intra-group tax exemption, absence of exit taxes and no tax on foreign source capital gains derived by Malta resident non-domiciled companies and Malta branches. Furthermore, Malta has no official transfer pricing, thin-capitalisation and CFC rules. Advanced tax rulings and informal revenue guidance are available, but, although sometimes recommended, this is not required.

The Maltese authorities continually demonstrate their commitment to provide incentives for IP holding and research and development activities carried out from Malta. Besides the fiscal incentives and legal flexibility, a highly qualified workforce, relatively low operational costs of carrying out commercial activities and the fact that English, as an official language, is very widely spoken, make Malta a very attractive and advantageous jurisdiction for doing business.

Companies spend billions of dollars on R&D to boost innovation output in the expectation of increasing profitability. From a study publised today by Booz Allen Hamilton, “Smart Spenders: The Global Innovation 1000“, it appears that it is not as easy as that: R&D spending does not necessarily increase profits. Booz Allen Hamilton’s annual study of the world’s 1,000 largest corporate R&D budgets uncovers a small group of high-leverage innovators who outperform their industries. Financial Times, claims it undermines repeated calls by governments in the UK and Europe for more corporate investments to close the transatlantic technology gap with the US. The Booz Allen Hamilton study, to be published in “strategy+business” seem to come to opposite conclusions as the DTI Scoreboard 2006, a study recently published by the UK Department of Trade & Industry (DTI).

However, the Booz Allen and DTI studies use different methodologies to rate R&D spending and its effects. Booz Allen conducts a more detailed analysis of the financial performance of the world’s leading R&D spenders to find the linkages between spending on innovation and corporate performance. This allows Booz Allen to identify the companies that outperform their competitors by getting better results from their innovation investment.

Both studies find increased R&D investment by the companies that spend the most on R&D spending. However, the Booz Allen study reports that revenues rose at an even faster rate.

Indeed, the most meaningful indicator of innovation investment, R&D spending as a percentage of sales, has decreased steadily since 2001, and by that measure, only 40% of the companies actually increased their spending rate in 2005.

Most importantly, the two studies examine the link between R&D and performance at different levels.

The DTI study shows that R&D-intensive industries, such as software, have higher market capital and grow share price faster than industries, such as chemicals, that spend a lower percentage of sales on R&D. This does not mean, however, that one software or chemical company spending more on R&D than its competitors will therefore enjoy higher financial results.

By contrast, the Booz Allen study focuses on companies, and finds no relationship between R&D spending and the primary measures of corporate financial performance. By indexing R&D spend within industries, Booz Allen eliminates Wall Street bias of one industry over another and are able to examine performance drivers within and across industries. High leverage innovators such as Toyota and Apple stand out for their effectiveness as innovators, even when spending less on R&D than their competitors, both in percentage and absolute terms.

In the end, both studies agree that return on innovation investment depends on the effectiveness of a company’s innovation processes and organization, rather than the magnitude of its R&D spend (“Money doesn’t buy results”). A business also needs to make good strategic choices, demonstrate operational excellence and balance its R&D investment with investment in areas such as market development and design for production.